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Those who invested in
Avon Products AVP 2.5974025974025974%Avon Products Inc.U.S.: NYSEUSD5.53
0.142.5974025974025974%
/Date(1481234509195-0600)/
Volume (Delayed 15m)
:
5260324AFTER HOURSUSD5.53
%
Volume (Delayed 15m)
:
44800
P/E Ratio
N/AMarket Cap
2358216562.37375
Dividend Yield
4.3399638336347195% Rev. per Employee
203424More quote details and news »AVPinYour ValueYour ChangeShort position
when Barron's recommended shares of the door-to-door cosmetics seller in the spring of 2009 ("Time to Make Up With Avon," March 16, 2009) were sitting pretty one year later when the stock had doubled to $33. But after a bribery scandal in China, disappointing sales results in key markets and waning confidence in management, shares are back where they started, at a recent $16.54.

There is little reason to think they will rally again until the company gets a better grip on its problems.

Avon (ticker: AVP) indicated last week that new management is needed to right the ship, announcing Tuesday that it would split the roles of chairman and chief executive, with long-time CEO Andrea Jung relinquishing the CEO post to become executive chairman. The board has launched an external search for a new CEO.

Avon shares trade for nine times next year's expected earnings of $1.82 a share. That isn't rich, but it isn't cheap, either, unless a clear path to a recovery emerges for the business. We aren't betting on that yet, and would advise holding the shares, or waiting to buy, until it is clear that a new CEO is making the changes necessary. (For another look at Avon, see "Avon Awaits a Management Makeover," Dec. 14, on Barrons.com.)

Avon's new CEO has a big to-do list: revitalize and streamline the company's product lineup; make product introductions more consistent; refocus the marketing strategy; redesign the ordering system; and expand the corporate structure to put more managers on the ground in various markets.

The good news is that Avon remains active in fast-growing emerging markets such as Mexico, Brazil and Russia. Indeed, roughly 60% of last year's total sales of $10.9 billion were generated in these and other developing countries.

But the company has had problems making strategic decisions and sticking to them, says Barclays Capital analyst Lauren Lieberman. For example, Avon has said it wants to introduce new products to generate excitement and attract younger reps, but has been reluctant to discontinue older products for fear of alienating seasoned salespeople. Lieberman rates the stock Equal Weight, and recently lowered her price target to $18 from $20.

Management also said it wants to pare Avon's non-beauty products like Christmas wreaths and jewelry to reduce supply-chain problems. But the company demurred when reps protested these changes.

"They have to be willing to endure the pain," Lieberman says. "You figure out how to manage the inventory and demand or you get rid of it, and you [anger] people but you end up with better reps."

Avon pays a 92-cent dividend and yields 5.6%, reflecting the stock's decline. But the beauty is superficial, and is likely to stay so until the underlying business begins to recover.

GM trades for just five times both 2011 and 2012 projected profits of around $4 a share, and its stock-market value of $34 billion barely exceeds the $33 billion in cash that it holds. One fan and relatively new holder is Greenlight Capital's chief, David Einhorn, who wrote in a recent investor letter that economic concerns already were priced into the stock, and that he sees "significant upside, even if the U.S. experiences a very slow 'new normal'-type economic recovery."

GM At A Glance

Recent Price

$20

YTD Change*

-45%

P/E 2011E

5.1

P/E 2012E

5.3

Stk-Mkt Val

$34 bil

Div Yld

None

Cash

$33 bil

Debt**

$11 bil

Health-Care, Pension Liabilities***

$25 bil

Largest Holder

U.S. (30%)

*Through Thursday. **Includes preferreds. ***Unfunded.

Sources: Thomson Reuters; company reports

Like nearly all GM investors since the auto maker's 2010 IPO at $33 a share, Einhorn is sitting with losses—his cost is around $26. Barron's has erred on General Motors because we've been bullish since the initial offering. Our most recent favorable piece was published last spring, ("GM's Comeback, Still Gathering Speed," May 16) when the stock was trading around $31.

GM is Morgan Stanley analyst Adam Jonas' top U.S. auto-related stock, and he has a $45 price target on it. Last week, he wrote: "We believe GM shares would appreciate significantly if earnings end up anywhere near the consensus levels of $4 a share in 2012, Europe is contained, pension worries are alleviated"—and U.S. vehicle sales run at 13 million to 14 million next year, in line with recent trends.

Thursday, he said that the GM story is as much about financials as about the company's increasingly attractive and profitable vehicle lineup, including successes like the Chevrolet Cruze and Equinox—a compact car and a crossover, respectively. He's optimistic about GM's redesigned full-size pickups, due out in late 2012. These vehicle lines—the updated Chevy Silverado and GMC Sierra—are critical because they could account for half of GM's domestic profits.

Jonas acknowledges that the Detroit auto maker could be a "value trap" for investors. While GM looks ridiculously cheap, there are negatives. It has $11 billion of debt and preferred stock outstanding, plus large unfunded pension and health-care obligations totaling an estimated $25 billion. And, while GM is profitable, it is generating virtually all of its earnings in North America and China. Europe is losing about $1 billion annually, with little hope of near-term profitability, given the economic problems there.

The company issued disappointing fourth-quarter profit guidance on its third-quarter earnings conference call. And recent fires in its showcase electric car, the Chevrolet Volt, whose lithium ion batteries erupted after undergoing government crash tests, have evoked an image of the same old blundering GM.

The auto giant, which has regained its title as the largest seller of cars and light trucks in the world, isn't paying a dividend and isn't buying back stock, while a large share overhang remains, with Uncle Sam holding a 30% stake—a legacy of the bankruptcy and bailout that saved the company during the financial crisis.

A GM dividend is possible in 2012—Ford recently reinstated its payout, which now yields almost 2%—but a share buyback appears unlikely.

On balance, General Motors looks appealing because it's likely to remain profitable, barring a major global economic slump. GM has attractive assets, including its core North American operations and $33 billion in cash. Its thriving Chinese joint venture, a finance business, tax benefits and other assets could be worth another $20 billion to $25 billion. But investors may have to wait to capitalize on the positives.

-- Andrew Bary

Nice Surprise From Seaspan

Shares of
SeaspanSSW 0.31746031746031744%Seaspan Corp.U.S.: NYSEUSD9.48
0.030.31746031746031744%
/Date(1481234523650-0600)/
Volume (Delayed 15m)
:
388777AFTER HOURSUSD9.48
%
Volume (Delayed 15m)
:
P/E Ratio
N/AMarket Cap
998609796.967889
Dividend Yield
15.822784810126583% Rev. per Employee
187910More quote details and news »SSWinYour ValueYour ChangeShort position
soared last week on news of the shipping company's tender offer for 10 million of its shares (ticker: SSW) at $15. That price is almost 44% above the stock's closing quote on Monday, the day before the announcement was made, and 13% higher than the $13.28 it was trading at when Barron's wrote favorably about the company two months ago ("Navigating Rough Seas," Oct. 17).

CEO Gerry Wang said the offer "reflects our confidence in the company's future prospects and, we believe, is an efficient way of returning capital to shareholders."

Our article noted Seaspan's strong business plan, sound financials and good dividend, now yielding more than 6%. Despite global economic sluggishness, its 65-ship fleet is fully leased out, with a remaining average charter period of seven years.

Seaspan's fleet is fully leased out, with a remaining charter period of seven years.
Udo Weitz/Bloomberg News

Wells Fargo shipping analyst Michael Webber views the announcement as "a material positive for [the] shares, particularly given that management will not be participating in the offer…."

The transaction will be executed on a pro-rata basis, meaning that if investors tender, say, 20 million shares, the company will buy half the number each investor has tendered as of midnight, Jan. 11, 2012.

And because Seaspan's free float is 47.4 million shares, investors do run the risk of having only a portion of their shares accepted. That helps explain why the stock isn't trading closer to the tender price.

In any case, the announcement has set up an arbitrage. Even if only half of an investor's shares are purchased, the return would be substantial, particularly for anyone who bought the shares in the past two months. Friday, the stock closed at $13.14.